Stock Analysis & Ideas

NOW Stock: Headwinds Continue but Growth Opportunities Exist

Story Highlights

Shares of ServiceNow tanked 12.7% on Tuesday following the CEO’s comments regarding a strengthening dollar and other macro headwinds. However, the company’s top management remains confident of NOW achieving Q2 revenues of $1.67 billion amid this volatility. Let us look at the reasons behind the management’s optimism.

Shares of ServiceNow (NYSE: NOW) were down 12.7% on Wednesday to close at $427.94 after the cloud‑based platform company’s CEO, Bill McDermott, told CNBC’s Mad Money host, Jim Cramer, that besides other macro headwinds, the strengthening U.S. dollar could prove to be a strong headwind for technology companies.

Let us look at whether the rising U.S. dollar could pose a threat to the growth of ServiceNow.

McDermott commented further on the strong U.S. dollar, “You’re going to see the headwind of the dollar right now against well-known technology brands. No one’s going to outrun the currency right now.”

As McDermott put it succinctly, “The mood is not great.”

Strong Demand For ServiceNow’s Platform Amid Volatility

Last month, while ServiceNow’s CFO Gina Mastantuono acknowledged the macro headwinds in a chat with Mizuho Securities analyst Gregg Moskowitz, she reiterated that the “demand for the ServiceNow platform remains strong.”

Mastantuono added that “digital transformation initiatives continue to deliver plenty of growth opportunities for its business.”

Even as the currency headwinds continue to worsen in recent months, Mastantuono stated that she remained “confident in the co.’s projections for the 2Q.”

ServiceNow has projected Q2 subscription revenues to be in the range of $1.67 billion to $1.675 billion, likely to grow 26% year-over-year.

ServiceNow’s Impact Solution and the New San Diego Release

Mastantuono was also upbeat about ServiceNow’s Impact solution, a “personalized service that can accelerate digital transformation by combining AI-powered recommendations, expert guidance, and premium tech support.”

The CFO pointed out that the Impact solution had exceeded the company’s own expectations and NOW had closed more than 100 transactions in the quarter. Mastantuono expects that the “ServiceNow Impact will help drive broader consumption of its platform over time,” and noted that “transactions involving ServiceNow Impact carry an uplift in ACV [annual contract value].”

Mastantuono also told analyst Moskowitz that ServiceNow’s latest Now platform San Diego release was “by far its most innovative release” and had “generated the highest percentage of platform upgrades at an early stage.”

Given the strong demand for NOW’s products and its competitive positioning, analyst Moskowitz expects “continued high growth over the next few years” for ServiceNow, “which should be aided by robust demand for workflow automation, strong cross-sell opportunities, and greater penetration of newer markets.”

As a result, the analyst reiterated a Buy rating and a price target of $550 on the stock. The analyst’s price target is the lowest on the Street and implies an upside potential of 28.5% at current levels.

Other analysts on the Street also sided with Moskowitz and continue to be bullish about ServiceNow with a Strong Buy consensus rating based on 22 Buys and one Hold. The average NOW price target of $632.75 implies an upside potential of 47.8% at current levels.

Bottom Line

While ServiceNow continues to battle macro headwinds, the company seems to be poised for long-term growth. Even investors on TipRanks are very positive about the stock as indicated by the TipRanks Crowd Wisdom tool.

This tool indicates that 26.6% of the top-performing portfolios on TipRanks have upped their holdings of the stock in the past 30 days.

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